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New Voices in the Boardroom: The Gradual Evolution of Board Composition

New Voices in the Boardroom: The Gradual Evolution of Board Composition

The stakes for having the right people around the boardroom table have
never been higher. Directors need to have the skills and experiences that
not only align with their company’s long-term strategic direction but also
enable their boards to effectively advise management amid unprecedented
change and business disruption. Board succession has emerged as a key
priority for shareholders, who increasingly expect boards to have a rigorous
process in place for assessing board composition and refreshment.
Of particular concern are whether there is enough diversity in the boardroom,
whether the board has the right combination of skills, and how the
board views director tenure.

Notably, directors with diverse profiles are increasingly joining US
boardrooms. However, a chronically low rate of director turnover is bringing
about only gradual shifts in the overall makeup of US boards. The modest
pace of change is likely to persist, meaning that corporate boards are
likely to evolve only incrementally.

Directors with diverse profiles are increasingly joining US boardrooms.

Looking to the year ahead, the following represent the board trends
Spencer Stuart believes will continue or accelerate in 2019, and how they
are likely to shape board composition in 2019 and beyond.

The stakes for having the right people around the boardroom table have
never been higher. Directors need to have the skills and experiences that
not only align with their company’s long-term strategic direction but also
enable their boards to effectively advise management amid unprecedented
change and business disruption. Board succession has emerged as a key
priority for shareholders, who increasingly expect boards to have a rigorous
process in place for assessing board composition and refreshment.
Of particular concern are whether there is enough diversity in the boardroom,
whether the board has the right combination of skills, and how the
board views director tenure.

Notably, directors with diverse profiles are increasingly joining US
boardrooms. However, a chronically low rate of director turnover is bringing
about only gradual shifts in the overall makeup of US boards. The modest
pace of change is likely to persist, meaning that corporate boards are
likely to evolve only incrementally.

Directors with diverse profiles are increasingly joining US boardrooms.

Looking to the year ahead, the following represent the board trends
Spencer Stuart believes will continue or accelerate in 2019, and how they
are likely to shape board composition in 2019 and beyond.

Turnover will continue to be driven by director departures
and mandatory retirement in the near term.

In 2018, S&P 500 companies added the highest number of new directors
since 2004 — roughly 0.88 new independent directors per board. That said,
overall turnover in US boardrooms is modest, and is likely to remain so for
the foreseeable future, impeding meaningful year-over-year change in the
overall composition of S&P 500 boards. During the 2018 proxy season, a little
more than half of S&P 500 boards (57%) added one or more new directors.

Barring changes in boardroom refreshment practices, this trend is
likely to continue. Limits on director tenure are rare today. Only 25 S&P
500 boards (5%) set explicit term limits for nonexecutive directors, with terms
ranging from 9 to 20 years. Additionally, it does not appear that individual
and/or peer assessments are regularly used by boards to promote refreshment.
Only 38 percent of S&P 500 companies report some form of individual
director evaluations, a percentage largely unchanged over the past five years.

Instead, S&P 500 boards are likely to continue relying on mandatory
retirement policies to stimulate board turnover. Today, 71 percent of S&P
500 boards disclose a mandatory retirement age for directors, consistent
with the past five years. Retirement ages also continue to climb. In 2008,
a meager 11 percent of S&P 500 companies with mandatory retirement
policies set the age limit at 75 or older, compared to 43.5 percent today.
More than half of these companies mandate a retirement age of at least 73
or older. Three boards have a retirement age of 80.

Three-quarters of the independent directors who left S&P 500 boards
in the 2018 proxy season served on boards with mandatory retirement
ages. The age limits appeared to have influenced many of these departures —
37 percent of retirees had reached or exceeded the age limit at
retirement, and another 16 percent left within three years of the retirement
age. Currently, only 16 percent of the independent directors on S&P
500 boards with age caps are within three years of mandatory retirement.

Experience as a CEO, board chair, or similar position is no longer viewed as the only qualifying credential for director candidates.

The boardroom will gradually be reshaped by new
perspectives and expertise.

While modest turnover will continue, evidence suggests that boards will
use openings from director departures to inject fresh perspectives and
expertise into emerging areas of need.

For one thing, experience as a CEO, board chair, or similar position is
no longer viewed as the only qualifying credential for director candidates. Of the 428 new independent directors added to S&P 500 boards in the 2018
proxy year, only 35.5 percent were active or retired CEOs, board chairs, or similar, down from 47 percent a decade ago. Nor is a background in a public
company boardroom a requirement. First-time public company directors constituted 33 percent of the 2018 class of new S&P 500 directors. These
first-timers are younger than their peers and more likely to be actively
employed (64% versus 53%). They are less likely to be CEOs or chief operating
officers, and more likely to have other managerial experiences such as line
or functional backgrounds or to hold roles in division/subsidiary leadership.
They are also more likely to be minorities: 24 percent of first-time directors
in 2018 are minorities, versus 19 percent of all new S&P 500 directors.

Of the 428 new independent directors added to S&P 500 boards in the 2018 proxy year, only 35.5 percent were active or retired CEOs, board chairs, or similar, down from 47 percent a decade ago.

*Includes directors who had served or were serving as an executive director on a public company board.

Recognizing the strategic imperative for new perspectives and experience
in the boardroom, boards are increasingly adding directors with backgrounds
in technology, digital transformation and technologies, consumer marketing,
and other areas of emerging importance. Financial talent remains
prized, especially the experiences of chief financial officers, finance
executives, and/or investment professionals. That said, as investors have
continued to press for more gender diversity, S&P 500 boards have
increased the number of women directors, reaching a new high: 40
percent of new directors in the 2018 proxy year are women, an increase
from 36 percent in 2017.

Boards are also likely to enhance disclosures about composition. As
interest in boardroom composition among investors has increased, a
growing number of companies are voluntarily enhancing their disclosures
to highlight the diversity of their boards and to showcase how director skills
and qualifications align with company strategy. In fact, nearly a third (30%) of S&P 500 companies have published a board matrix spotlighting
the skills and qualifications of each director on their governance web page.

Younger directors may become a potent new voice in the
boardroom.

As boards prioritize new areas of expertise — such as industry and functional
experience in technology and digital transformation, and certain areas of
marketing and finance — many are tapping “next-generation” directors
whose qualifications align with the needs of their organizations. One out
of six directors (17%) in the 2018 class of new directors is age 50 or
younger.

Given that their backgrounds and profiles differ from more traditional
board members, these directors are likely to bring varied perspectives to
boardroom discussions. Nearly two-thirds of these “next-gen” corporate
directors have expertise in three sectors: technology/telecommunications
(34%), consumer goods (16%), and private equity/investments (14%). A
majority (almost two-thirds) are serving on their first public company
board. More than half (53%) are women.

Interestingly, these directors may also be less likely to have lengthy
tenures, due to factors such as the demands of their careers, a desire to move
on, or dissatisfaction with their board experience. Twenty-eight (7%) of
the 417 directors who left an S&P 500 board seat in the 2018 proxy season
were 55 years old or younger, with an average tenure of five years. Other
directors who departed their boards over the same period had a much
longer tenure on average (12.7 years) and were 68.4 years old on average.

Business demands and investor pressure are likely to change how boards think about composition and refreshment strategies.

The implications for your board

Business demands and investor pressure are likely to change how boards
think about composition and refreshment strategies. Increasingly, directors
are recognizing that board composition should support and reflect the strategic
needs of the organization. Boards can use the following recommendations
to enhance short- and long-term approaches to their composition:

Have an ongoing refreshment strategy.

The composition of the board should be viewed as a strategic asset. Boards
will be better prepared to plan for and take advantage of openings if there
is a formal approach to refreshment. This includes regularly reviewing
and aligning the board’s makeup to the company’s strategic direction,
identifying desired competencies for future directors, and regularly infusing
the board with perspectives relevant to the organization’s future needs.

Increasingly, investors consider meaningful full-board and individual
assessments as “best practice” not only for evaluating and enhancing board
and director performance but also for promoting boardroom refreshment.
While annual evaluations have become the norm for boards, far fewer — 38
percent of S&P 500 boards — report some form of individual director evaluations. Proactive boards assess skills and attributes, incorporating results
from board self-assessments. They also take a multiyear view of departures,
including upcoming board leadership changes, and set clear expectations
around director tenure.

Key Questions for Directors to Consider:

Does the board as currently
constituted give the company
its best shot at success in
supporting the strategy?

What additional, and potentially
underrepresented, skills or
expertise would significantly
enhance the board’s ability to
do its job?

What are our refreshment
mechanisms and strategy, and
how are they communicated
to stakeholders, including
investors?

Are we using board evaluations
to help identify gaps in expertise and skills the board may
require in the coming years?

Is our onboarding program
robust and tailored to
individual director needs
and backgrounds?

Position new directors for success.

The nominating and governance committee chair and other board leaders
should ensure that the board has a robust new-director orientation program
in place. Incoming directors, particularly younger and first-time board
members, benefit from an orientation and continuing education that
familiarize them with the company’s needs and the board’s approach to
governance. At a minimum, a director onboarding program should
provide insights about public disclosures and nonpublic materials (such as
board meeting minutes, forecasts, budgets, strategic plans, etc.) and
socialize the new director(s) with key executives and members of senior
management. Additionally, the board should recognize that new directors
may find it helpful to partner with a mentor — formally or informally — who they can turn to for questions and feedback.

With greater focus on diversity, board culture becomes critical.

Boards are adding new perspectives to enhance board deliberations and
improve outcomes. But greater diversity also increases the likelihood of
misunderstanding and tension among directors with different points of
view and backgrounds. In the past, boards tended to be more homogeneous
and, as a result, there was typically more implicit agreement about director
interaction and behavior. Today, with higher levels of diversity in the
boardroom — whether in terms of experiences, skills, gender, race, ethnicity,
nationality, and/or age — it’s critical to create a boardroom culture that
facilitates constructive interactions between board members. All boards can
benefit from cultures that value inquisitiveness and flexibility, and where
directors are comfortable challenging one another’s — and management’s — assumptions and ideas.

Note: This article was originally published in the NACD 2019 Governance Outlook.

Turnover will continue to be driven by director departures
and mandatory retirement in the near term.

In 2018, S&P 500 companies added the highest number of new directors
since 2004 — roughly 0.88 new independent directors per board. That said,
overall turnover in US boardrooms is modest, and is likely to remain so for
the foreseeable future, impeding meaningful year-over-year change in the
overall composition of S&P 500 boards. During the 2018 proxy season, a little
more than half of S&P 500 boards (57%) added one or more new directors.

Barring changes in boardroom refreshment practices, this trend is
likely to continue. Limits on director tenure are rare today. Only 25 S&P
500 boards (5%) set explicit term limits for nonexecutive directors, with terms
ranging from 9 to 20 years. Additionally, it does not appear that individual
and/or peer assessments are regularly used by boards to promote refreshment.
Only 38 percent of S&P 500 companies report some form of individual
director evaluations, a percentage largely unchanged over the past five years.

Instead, S&P 500 boards are likely to continue relying on mandatory
retirement policies to stimulate board turnover. Today, 71 percent of S&P
500 boards disclose a mandatory retirement age for directors, consistent
with the past five years. Retirement ages also continue to climb. In 2008,
a meager 11 percent of S&P 500 companies with mandatory retirement
policies set the age limit at 75 or older, compared to 43.5 percent today.
More than half of these companies mandate a retirement age of at least 73
or older. Three boards have a retirement age of 80.

Three-quarters of the independent directors who left S&P 500 boards
in the 2018 proxy season served on boards with mandatory retirement
ages. The age limits appeared to have influenced many of these departures —
37 percent of retirees had reached or exceeded the age limit at
retirement, and another 16 percent left within three years of the retirement
age. Currently, only 16 percent of the independent directors on S&P
500 boards with age caps are within three years of mandatory retirement.

Experience as a CEO, board chair, or similar position is no longer viewed as the only qualifying credential for director candidates.

The boardroom will gradually be reshaped by new
perspectives and expertise.

While modest turnover will continue, evidence suggests that boards will
use openings from director departures to inject fresh perspectives and
expertise into emerging areas of need.

For one thing, experience as a CEO, board chair, or similar position is
no longer viewed as the only qualifying credential for director candidates. Of the 428 new independent directors added to S&P 500 boards in the 2018
proxy year, only 35.5 percent were active or retired CEOs, board chairs, or similar, down from 47 percent a decade ago. Nor is a background in a public
company boardroom a requirement. First-time public company directors constituted 33 percent of the 2018 class of new S&P 500 directors. These
first-timers are younger than their peers and more likely to be actively
employed (64% versus 53%). They are less likely to be CEOs or chief operating
officers, and more likely to have other managerial experiences such as line
or functional backgrounds or to hold roles in division/subsidiary leadership.
They are also more likely to be minorities: 24 percent of first-time directors
in 2018 are minorities, versus 19 percent of all new S&P 500 directors.

Of the 428 new independent directors added to S&P 500 boards in the 2018 proxy year, only 35.5 percent were active or retired CEOs, board chairs, or similar, down from 47 percent a decade ago.

*Includes directors who had served or were serving as an executive director on a public company board.

Recognizing the strategic imperative for new perspectives and experience
in the boardroom, boards are increasingly adding directors with backgrounds
in technology, digital transformation and technologies, consumer marketing,
and other areas of emerging importance. Financial talent remains
prized, especially the experiences of chief financial officers, finance
executives, and/or investment professionals. That said, as investors have
continued to press for more gender diversity, S&P 500 boards have
increased the number of women directors, reaching a new high: 40
percent of new directors in the 2018 proxy year are women, an increase
from 36 percent in 2017.

Boards are also likely to enhance disclosures about composition. As
interest in boardroom composition among investors has increased, a
growing number of companies are voluntarily enhancing their disclosures
to highlight the diversity of their boards and to showcase how director skills
and qualifications align with company strategy. In fact, nearly a third (30%) of S&P 500 companies have published a board matrix spotlighting
the skills and qualifications of each director on their governance web page.

Younger directors may become a potent new voice in the
boardroom.

As boards prioritize new areas of expertise — such as industry and functional
experience in technology and digital transformation, and certain areas of
marketing and finance — many are tapping “next-generation” directors
whose qualifications align with the needs of their organizations. One out
of six directors (17%) in the 2018 class of new directors is age 50 or
younger.

Given that their backgrounds and profiles differ from more traditional
board members, these directors are likely to bring varied perspectives to
boardroom discussions. Nearly two-thirds of these “next-gen” corporate
directors have expertise in three sectors: technology/telecommunications
(34%), consumer goods (16%), and private equity/investments (14%). A
majority (almost two-thirds) are serving on their first public company
board. More than half (53%) are women.

Interestingly, these directors may also be less likely to have lengthy
tenures, due to factors such as the demands of their careers, a desire to move
on, or dissatisfaction with their board experience. Twenty-eight (7%) of
the 417 directors who left an S&P 500 board seat in the 2018 proxy season
were 55 years old or younger, with an average tenure of five years. Other
directors who departed their boards over the same period had a much
longer tenure on average (12.7 years) and were 68.4 years old on average.

Business demands and investor pressure are likely to change how boards think about composition and refreshment strategies.

The implications for your board

Business demands and investor pressure are likely to change how boards
think about composition and refreshment strategies. Increasingly, directors
are recognizing that board composition should support and reflect the strategic
needs of the organization. Boards can use the following recommendations
to enhance short- and long-term approaches to their composition:

Have an ongoing refreshment strategy.

The composition of the board should be viewed as a strategic asset. Boards
will be better prepared to plan for and take advantage of openings if there
is a formal approach to refreshment. This includes regularly reviewing
and aligning the board’s makeup to the company’s strategic direction,
identifying desired competencies for future directors, and regularly infusing
the board with perspectives relevant to the organization’s future needs.

Increasingly, investors consider meaningful full-board and individual
assessments as “best practice” not only for evaluating and enhancing board
and director performance but also for promoting boardroom refreshment.
While annual evaluations have become the norm for boards, far fewer — 38
percent of S&P 500 boards — report some form of individual director evaluations. Proactive boards assess skills and attributes, incorporating results
from board self-assessments. They also take a multiyear view of departures,
including upcoming board leadership changes, and set clear expectations
around director tenure.

Key Questions for Directors to Consider:

Does the board as currently
constituted give the company
its best shot at success in
supporting the strategy?

What additional, and potentially
underrepresented, skills or
expertise would significantly
enhance the board’s ability to
do its job?

What are our refreshment
mechanisms and strategy, and
how are they communicated
to stakeholders, including
investors?

Are we using board evaluations
to help identify gaps in expertise and skills the board may
require in the coming years?

Is our onboarding program
robust and tailored to
individual director needs
and backgrounds?

Position new directors for success.

The nominating and governance committee chair and other board leaders
should ensure that the board has a robust new-director orientation program
in place. Incoming directors, particularly younger and first-time board
members, benefit from an orientation and continuing education that
familiarize them with the company’s needs and the board’s approach to
governance. At a minimum, a director onboarding program should
provide insights about public disclosures and nonpublic materials (such as
board meeting minutes, forecasts, budgets, strategic plans, etc.) and
socialize the new director(s) with key executives and members of senior
management. Additionally, the board should recognize that new directors
may find it helpful to partner with a mentor — formally or informally — who they can turn to for questions and feedback.

With greater focus on diversity, board culture becomes critical.

Boards are adding new perspectives to enhance board deliberations and
improve outcomes. But greater diversity also increases the likelihood of
misunderstanding and tension among directors with different points of
view and backgrounds. In the past, boards tended to be more homogeneous
and, as a result, there was typically more implicit agreement about director
interaction and behavior. Today, with higher levels of diversity in the
boardroom — whether in terms of experiences, skills, gender, race, ethnicity,
nationality, and/or age — it’s critical to create a boardroom culture that
facilitates constructive interactions between board members. All boards can
benefit from cultures that value inquisitiveness and flexibility, and where
directors are comfortable challenging one another’s — and management’s — assumptions and ideas.

Note: This article was originally published in the NACD 2019 Governance Outlook.